How I Pay Myself First
1. Set a Goal
I start with an “emergency fund” savings goal in mind. I calculate how much money I want to save; there are many rules of thumb for this, but I create the goal by thinking I want to my “emergency fund” to be between 1-2 years worth of my living expenses.
2. Work Backwards
Once I know my annual savings goals, I divide that number by 12 to get my monthly savings goals and then divide that number by two for the bi-weekly breakdown. I actually keep a post-it with this magic number in my wallet and each time I go to the bank, I take a look at it for focus and accountability. (I still do banking in person. I’m a dinosaur, but it works for me). If you use online banking, automate this deduction.
3. Don’t Touch This Money Unless It’s An Emergency (A Real Emergency)
Let’s be clear: a deep discount on some shoes with a red bottom (or any other color) does not constitute an emergency. A Groupon deal for a weekend trip to Antigua, though tempting, is not one either. Medicine that is not covered by your insurance, a missing part for your leaky car, back taxes, and the money that you owe your bookie—yeah, great candidates for dipping into the emergency fund.
But I Have Debt!
So what? Still pay yourself first. You need this money to weather the slips, trips, and falls of life. Your emergency fund guards against getting yourself deeper into debt in the event that sickness, job loss, divorce, an unexpected pregnancy, or death come.
How much do you need for your emergency fund?